Two months into the merger that formed CommonSpirit Health, rising expenses and slumping revenue led to a $100 million operating loss in the quarter that ended March 31.
The Chicago-based health system created through the Feb. 1 merger of Catholic Health Initiatives and Dignity Health reported the loss in the third quarter of its fiscal 2019. It represented a noteworthy swing from the system's operating gain of $144 million in the prior-year period. The earlier period was derived by combining the results of the two separate systems. CommonSpirit's operating margin fell from 2% to -1.4% in that time as expense growth far outpaced a slight decline in revenue.
Not-for-profit CommonSpirit's overall revenue dipped by $57 million year-over-year to just under $7.3 billion in the recently ended quarter, despite a 1.4% increase in net patient revenue. The decline was entirely in categories labeled "other operating revenue" and "revenue from health-related activities." Dignity spokesman Dan Loeterman said the former is related to the sale of U.S. HealthWorks. Dignity agreed last year to merge that company with Select Medical's Concentra in exchange for $505 million and a 20% ownership stake in the combined company.
In an analysis of its performance, CommonSpirit representatives wrote that within overall revenue, net patient revenue increased year-over-year due in part to sicker patients and the addition of two Arizona hospitals Dignity bought in June 2018. The system said revenue was offset by increases in implicit price concessions, which is a new way some hospitals report bad debt, and less money coming from U.S. HealthWorks.
The health system's expenses grew 2.6% year-over-year. CommonSpirit's largest expense increase was in purchased services, which jumped 3.3%. The system explained that was because of increased medical fees, repairs, maintenance costs and costs related to the consolidation of the new Arizona hospitals. Supplies grew 1.9%, which the system said was primarily due to the decline in value of CommonSpirit's investment in the stock of a third-party group purchasing organization and increased pharmaceutical costs.
Strong investment returns helped CommonSpirit's net income grow to $500 million in the third quarter, compared with $213 million in the prior-year period. CommonSpirit drew $666 million in investment income during the quarter—almost three-quarters of that in the form of unrealized gains—compared with $64 million in the prior-year period.
CommonSpirit's cash from operating activities dwindled in the quarter. The system used $66 million for operating activities, compared with $390 million in cash provided by operating activities in the prior-year period. Admissions fell nearly 2% year-over-year, to about 211,000. Acute inpatient days declined almost 1% in that time to about 992,000. Patient days were mostly flat.
CommonSpirit Chief Financial Officer Daniel Morissette said in a statement that the third-quarter results represent a significant step toward creating a strong operational foundation for the new organization.
"We posted strong results in patient volumes and in our investment portfolio," he said. "The results included some expected costs relating to our integration work, and we remain focused on making operational progress moving forward."
